A new piece of research by Queen Mary, University of London, showing that paying the Living Wage has big benefits for business, workers and the Treasury.

The research is the first to provide data showing the Living Wage increases the happiness of workers; it shows:

Over half of employees (54%) felt more positive about their workplace once the LW was introduced and 52% felt more loyal
Staff leaving rates fell by 25%
Almost a third (32%) of workers felt it benefitted their family life by allowing them to do things like spend more time with family
Almost 4 in 10 (38%) workers reported financial benefits such as being able to buy more goods and save more

In addition companies interviewed said the reputational benefits of paying the LW helped them attract new business and customers. Employers also reported HR benefits at all levels with high caliber graduates at one employer citing paying the living wage as one of the top 3 reasons for applying as it demonstrates corporate social responsibility.

The research shows that government and workers also benefit. Paying the LW can help struggling families and improve Treasury finances at a time of economic difficulty:

Government could save almost £1bn a year because of the increase in the tax base and reduced welfare spending just from firms in London paying the Living Wage
A two person household could get up to an extra £5000 a year

There are wage costs associated with paying the LW and the research shows that for those companies surveyed:

Wage cost increases due to its introduction were 6% of the contract cost. This is despite low-paid staff receiving much higher increases in their hourly rate of pay (an average of 26%)
This is because introducing the LW leads companies to adjust their ways of working by doing things such as increasing efficiency of working practices.

Despite these benefits, new analysis funded by Trust for London shows that there has been a 100,000 increase in the number of London jobs paying below the London Living Wage (LLW) – taking the total to 580,000. This means that 1 in 5 Londoners working in the capital are now paid poverty wages.

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Wage cost increases due to its introduction were 6% of the contract cost. This is despite low-paid staff receiving much higher increases in their hourly rate of pay (an average of 26%)
This is because introducing the LW leads companies to adjust their ways of working by doing things such as increasing efficiency of working practices.

Be interesting to see whether the increasing efficiency leads to a lowering of employment levels (ie gives rise to higher unemployment.)

“Be interesting to see whether the increasing efficiency leads to a lowering of employment levels (ie gives rise to higher unemployment.)”

I assume that “increasing efficiency of working practices” is code for “hire fewer people”. I don’t see how else you can keep wage costs down while increasing wages (except sacking people, of course).

Also worth pointing out that most of the benefits to companies seem to rely on the LW being optional: there’s no reputational benefit in doing the same thing as everyone else because the law requires it.

Paul Krugman has pointed out one of those points quite forcefully. The reputation (and lower staff turnover etc) come from paying more than everyone else. If everyone raises their wages then the benefits disappear.

And of course that was why Ford introduced those $5 a day wages. To reduce staff turnover by offering more than everyone else.

Isn’t there a problem for workers who get moved up from minimum wage to the touted living wage due to loss of tax credits? In other words, the employer ends up with a bigger wage bill, but the worker doesn’t get much more because of withdrawal of tax credits.

But then I’ve never managed to get my head round tax credits. What’s the point in workers earning rubbish wages so low the taxpayer has to subsidise them? More than that, we have to employ a massive bureaucracy to pay out the tax credits. Surely if the labour market wasn’t distorted by taxpayer subsidies, companies would have no choice other than to pay the going rate, which probably means a living wage.

Worstall is trying to imply that high wages cause unemployment. The opposite is true: empirically, low unemployment and high wages go hand in hand. It doesn`t take a genius to understand why – low wages lead to low demand for goods & services which leads to a lower demand for labour, in turn leading to higher unemployment. Central banks like the Bank of England deliberately raise interest rates during a boom in order to reduce demand, they do this to increase unemployment.

The minutes of the Bank`s June 1998 meeting, for instance, reveal a concern that wage rises indicate a need for unemployment to rise:

There are no shortage of explanations from the Right for persistent unemployment – they all involve criticism of the effects on employment levels of every progressive reform which has improved the situation of working people since the appalling conditions of the nineteenth century.

No No No. For a progressive party that wants to ensure that the poor are better off you do things arse about face.

If you want poor people to have a better wage you must remove them from paying tax. The minimum salary at which tax must be paid has to be placed at the current minimum wage. Those on a minimum wage must not pay tax.

Note that SadButMadLad does not suggest raising corporation tax so that the low paid carry less of the tax burden!!

SadButMadLad is another fake libertarian like Worstall who wants to cut income tax for the following very cynical reason:

Eliminating income tax for people on the minimum wage will mean less tax is available for the Welfare State, so benefits will be lowered to “balance the books”. The consequences of unemployment will be more serious due to the lower benefits so the fear of unemployment will be greater, further disciplining the working class, and allowing employers to reduce real pay and conditions and thereby make bigger profits.

@NorthernWorker – Tax Credits bin their current form were a New Labour response to market inequality, the forgotten part of mandlesons famous idea fo being relaxed about people getting rich ..as long as they paid their tax which could be used to shore up the wages of the poor.

Although I think in-work benefits were started earlier by the Tories in an attempt to stop the cliff edge effect of moving from benefits to work.

Peronally while both schemes were well intentioned, they are papering over the cracks of trying to build a firts world economy based on low skill, low wages and “flexible” labour markets. An economy that even while growing in the late 90’s and up to 2008 was increasing the benefits bill.

As with Osborne now, slashing investment to pay for unemployment (and under-emplyment), we should have used the money to seed high end manufacturing to complement the financial services, to create well paid jobs with a view to cutting the in work benefits bill.

I was struck by a comparison between the UK and Danish government child care spending. Both spend about 3% of GDP on Child Services, Denmark has virtually free child care provison, returning highly trained female workers back to the workforce as quickly as possible..the UK spend the same proportion suplementing wages, while working parents spend huge amounts on child care and some parents decide they are better off on benefits.

“No No No..The minimum salary at which tax must be paid has to be placed at the current minimum wage. Those on a minimum wage must not pay tax.”

I’m not so sure about that. I’m sympathetic to the argument that there’s an over-riding social compact involved, and that taxation can be best understood as a contributory arrangement – in short, that individuals pay taxes primarily in order for that money to be returned to us by way of social benefits, whether that be street lighting, the NHS, financial support in the case of (say) unemployment or disability, or whatever.

While I accept that this is massively imperfect in practice, I’m attracted to the view that it’s important to social cohesion that everyone, no matter what their circumstances, is involved in the tax system.

“Note that SadButMadLad does not suggest raising corporation tax so that the low paid carry less of the tax burden!!”

Tax incidence, tax incidence. The bulk of the burden of corporation tax actually comes from the wages of the workers. By depressing investment and thus the productivity of labour over time. Increasing corporation tax is increasing taxes on the workers.

“Eliminating income tax for people on the minimum wage will mean less tax is available for the Welfare State, so benefits will be lowered to “balance the books”.”

I’m all in favour of cutting the size of the State, yes. But no, I don’t argue for a higher tax allowance for this reason. You can offset it easily enough anyway. By lowering the level at which people start to pay higher rate income tax. As was actually done in the last budget.

“Surely if the labour market wasn’t distorted by taxpayer subsidies, companies would have no choice other than to pay the going rate, which probably means a living wage.”

Evidently not, because ‘the going rate’ for low-skilled labour prior to the introduction of the subsidies you’re talking about was nowhere near a living wage. (2 million people were earning less than the level of the *minimum* wage when it came in – £3.60 – never mind a *living* wage.)

Desperate people will take what they can get. They don’t let their children starve while they hold out for a decent wage. (Just look at countries where there’s no welfare safety net at all; employers don’t find themselves having to offer a living wage in order to attract workers!)

Oh, and if I understand ‘the Living Wage’ as defined in current debates, it’s not actually supposed to represent a wage sufficient to live on with no state assistance, but a wage sufficient to live on for someone who claims all the benefits and tax credits they’re entitled to.

Northern Worker: “Surely if the labour market wasn’t distorted by taxpayer subsidies, companies would have no choice other than to pay the going rate, which probably means a living wage.”

Not the case when there is a big surplus of workers who are effectively disposable. Even if no-one can stick it for any length of time, these days there’s always another one willing to have a go. Especially with the DWP threatening people with removal of essential basics if they don’t take the first job available. I’m certain it’s often more economically efficient to have a high turnover of staff for a role where little training is required.

Not much good for society, but good for the bottom line of the company concerned.

Germany doesn’t have a minimum wage and I think that might be the case in some other EU countries (Sweden?). Does Germany have a system of tax credits to make up wages, or do German employers pay a decent wage?

I don’t know the answers, it’s not my specialty. What I do know is that right up to 15 years ago, the UK didn’t have a minimum wage or tax credits. I can’t say I noticed anyone starving.

I still think that tax credits are letting employers off the hook. Why would they pay decent money if the taxpayer is going to stump up the rest? Come to that, why pay more than minimum wage for most non-skilled jobs?

We need to look at the number of low paid, part-time jobs compared to full-time jobs which paid less than the LW or the NMW prior to its introduction. I would guess that they were taken by married women/those with children and possibly young people still living in the family home.

I would suspect that the low paid, full-time jobs which pay no more than the NMW are still being taken by those with children who can afford to take them because tax-credits will make-up their wages. Moreover, there has been a big increase in part-time working, so trying to make valid comparisons is much more complex than you are suggesting.

“What I do know is that right up to 15 years ago, the UK didn’t have a minimum wage or tax credits. I can’t say I noticed anyone starving.”

If not, that’s only because other forms of state assistance were available. It’s certainly not because up until 15 years ago, wages were high enough (and/or prices low enough) that no working household required income top-ups from the state.

“I still think that tax credits are letting employers off the hook.”

I kind of agree: wages should be higher, and in that case we could spend less on tax credits.

“Why would they pay decent money if the taxpayer is going to stump up the rest?”

Why would they pay decent money anyway? Unless, I suppose, we really were going to allow people to live on fairly generous out-of-work benefits indefinitely, so that employers had to offer something substantially more generous to tempt people into working. But 1 – that’s not exactly politically viable or desirable, and 2 – just think about the numbers involved. Suppose you’ve got a one-parent family claiming £18,000 a year in benefits and those benefits are withdrawn at a rate of £1 for every £1 earned (otherwise you’d be subsidising their wages). What’s an employer going to have to offer to tempt the parent into full-time work? £24,000, maybe? Something around double the current minimum wage, anyway.

Emmm so basically it’s a big, bloody mess, which benefits employers and does nothing for employees. I can’t see any employer paying a living wage when the whole system seems to be designed to sustain a minimum wage.

But doesn’t tax credits give an unfair competative edge especially for companies whose workforce is mainly low/unskilled and who can manage to attract staff because of the tax credit subsidy. In effect, the taxpayer is giving certain employers a competative advantage and/or financing production which really would not be viable if the manufacturer/service provider had to pay a wage which would attract workers?

Spare a thought for people working in telephone charity fundraising. Quite a few work on hour rates of between £6.50 to £7 an hour. It is a bit ironic that the charities are relaxed about professional fundraisers earning less than the living wage.

@24,
Well possibly, though they won’t get an advantage over similar companies operating in the same country.

In the end, the amount paid in tax credits has to be found from the whole population. If the NMW was higher, Corp tax could be lower, etc. The effect on a particular company might be negligable.

Of course, if the NMW was higher and corp tax abolished as a result, then there would be no more corporate tax avoidance. However, companies could move to a lower wage country, and then avoid their corp tax in the usual manner.

“Spare a thought for people working in telephone charity fundraising. Quite a few work on hour rates of between £6.50 to £7 an hour. It is a bit ironic that the charities are relaxed about professional fundraisers earning less than the living wage.”

no statutory minimum wage, except for construction workers, electrical workers, janitors, roofers, painters, and letter carriers. Minimum wage is often set by collective bargaining agreements in other sectors of the economy and enforceable by law